安富利 (AVT) 2018 Q2 法說會逐字稿

The presentation will now begin. I would now like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations.

Good morning, and welcome to Avnet's Second Quarter of Fiscal Year 2018 Business and Financial Update. As we provide the highlights for our second quarter fiscal year 2018, please note that in the accompanying remarks, we have excluded certain items including ERP accelerated depreciation, intangible asset amortization expense, restructuring, integration and other items and certain discrete income tax adjustments from all periods covered in our non-GAAP results.

When we refer to constant currency or the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-U. S. dollar-based financial statements into U.S. dollars. When we refer to organic sales, we have adjusted the prior period to include the impact of acquisitions. In addition, when addressing return on capital employed, return on working capital and working capital velocity, the definitions are included in the non-GAAP financial information section of our earnings press release available on our website at www.ir.avnet.com.

Before we get started with the presentation from Avnet management, I would like to review Avnet's safe harbor statement. This call contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. There are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors are set forth in Avnet's filings with the Securities and Exchange Commission.

In just a few moments, Bill Amelio, Avnet's CEO, will provide Avnet's second quarter fiscal year 2018 highlights. Following Bill, our interim Chief Financial Officer, Ken Jacobson, will review some additional financial highlights and provide third quarter and full year fiscal 2018 guidance. Also here today to take any questions you may have related to Avnet's business operations is Phil Gallagher, President, Electronic Components.

With that, let me introduce Mr. Bill Amelio to discuss Avnet's second quarter fiscal 2018 business highlights.

Thank you, Vince, and hello, everyone. Thank you for taking the time to be with us and your interest in Avnet.

We built on the progress that we made in the first quarter of fiscal '18 as revenues came in at the high end of guidance while adjusted EPS exceeded guidance in both gross profit and adjusted operating income margins increased from the September quarter. Revenue of $4.5 billion increased 5.8% year-over-year, with organic revenue increasing 1.9% in constant currency. Both the Americas and Asia regions exceeded expectations. When combined with continued growth in EMEA region, helped offset the prior program changes as electronic components revenue increased 4% year-over-year and 10.2% year-over-year when you exclude the impact of those channel shifts.

At Premier Farnell, organic revenue in constant currency increased 7.7% year-over-year driven by double-digit growth in our Asia region. Our cost reduction initiatives continue to gain traction as operating expenses declined $14 million or 2.9% sequentially, which contributed to a 17 basis point sequential increase in adjusted operating income margin.

Ken will go over more financial details later in the call. However, I want to give you some highlights of our achievements in Electronic Components Americas region this quarter. As discussed in our October call, the Americas region, which was disproportionately impacted by some prior program changes as well as their ERP disruption, has brought about and many of the metrics were beginning to improve. This quarter, I'm happy to report that the continued upward trend in performance metrics is having a positive impact on the Americas region's financial performance. Year-over-year reported revenue growth improved from a decline of 16% in the September quarter to a decline of 5.7% in the December quarter. Demand creation metrics continue to improve as design registrations were up both sequentially and year-over-year. And the cumulative design registrations have now offset the sockets we lost due to supplier program changes in a relatively short period of time.

Our growth initiatives continue to gain traction as evidenced by an improvement in sales process metrics this quarter. We've also begun to achieve some of the financial targets the suppliers built incentives around, which partially contributed to the 35 basis point sequential improvement in gross profit margin in the Americas region of Electronic Components. The combination of sequential growth, gross profit margin expansion and cost reductions led to a significant improvement in operating margins for the September quarter. With an improving book-to-bill and improving confidence of our suppliers and customers, we expect to continue this trend as we enter into the second half of fiscal 2018.

Now I'd like to provide you an update of the 4 pillars of Avnet's business strategy starting with our unique end-to-end ecosystem. Our ecosystem comprised of a small owner specialists, Premier Farnell; design-focused Hackster.io; and manufacturing solution provider, Dragon Innovation, provides a low-cost model to reach a wider base of engineers, makers and startups earlier in the design phase. In the December quarter, our community members grew nearly 10% sequentially and 42% year-over-year. We continue to make progress integrating lead handoffs within the digital ecosystem with a strong and rapidly growing customer opportunity pipeline, which is up 40% this quarter.

In February, we'll go live in the Americas with an enhanced digital functionality to allow customers to buy inventory from both Premier Farnell and Avnet, on our trading website, thereby increasing our SKU count on Avnet.com by approximately 50%. Our Hardware Studio, a collaboration between Avnet, Dragon Innovation and Kickstarter, provides resources and support for independent hardware creators, had a well-attended booth at the recent Consumer Electronics Show. Designed to make the manufacturing process for startups less daunting, the Hardware Studio booth provided live stream broadcast and demos from startups as well as one-on-one sessions where creators and engineers could get tips on factory selection, sourcing, manufacturing and much more.

Our second strategic pillar, the digitization of our business, represents a multiyear effort to digitize more of our processes. Our end-to-end ecosystem is a prime example of this effort as digital revenues now exceed $800 million on an annual run rate basis. By increasing our investment in new systems, we believe we'll be able to enhance the customer experience, to have greater productivity and leverage big data and advanced analytics to support growth initiatives. We took a major step in that journey when we transitioned our EBV division in Europe to a new ERP system at the beginning of January.

While we're still early in the cutover, I'm pleased to report that through the first 3 weeks of January, we are on track in meeting all critical deliverables. I want to congratulate the European team and our global IT organization on this significant milestone as we move closer to our goal of a global system that will provide greater efficiencies and data sharing across our businesses.

Many of the individuals in Europe who worked on the EBV ERP will now transition to the team that is designing our Americas ERP system. This will be based on the European system so that we can leverage the skills and experience on this critical next phase on our path to a global system.

Our third strategic pillar, our transformation initiative, is one of the most important as it reaches across the entire company, encompassing organizational structure, business processes to leverage the strength of Avnet. One of the important growth strategies that our transformation initiative has focused on is the Internet of Things. Although we're already been selling a lot of components in the IoT applications, we felt the addition of new services and solutions would accelerate our growth by reaching more potential customers.

Over the past year, we built a core team within the company, augmented with new hires from outside of Avnet to further enhance our go-to-market strategy. We showcased many of the results of this effort in the Consumer Electronics Show earlier this month, including our IoTConnect platform. IoTConnect, which utilizes the enterprise-grade Microsoft Azure hybrid cloud for data distribution and analysis, provides customers with a single go-to software platform to support the complex communication, device and data management capabilities required to deliver IoT solutions. This allows our customers to incorporate any hardware platform when they address their Edge enterprise requirement. It also serves as a foundation for our IoT partners' ecosystem, which creates vertical solutions that allow customers to develop applications built on secure and scalable IoT infrastructure. By collaborating with a broad cross-section of our supply base, we developed an extensive collection of smart, market-ready connectivity solutions to tackle business challenges common to many industrial verticals, including manufacturing, medical, environmental, retail and the smart city.

This quarter, we leveraged our nearly 2-year relationship with AT&T and introduced a new system-on-module IoT solution powered by AT&T IoT services that provides a complete development environment for both prototyping and production of sensor to cloud applications and services. From exclusive starter kits to production-ready modules, Avnet is working with AT&T to bring evolving LTE technology to market.

We also recently announced a significant collaboration with Not Impossible Labs, an innovative leader in the maker and startup community committed to creating technology for the sake of humanity. Avnet will be collaborating with Not Impossible Labs to bring full end-to-end IoT solutions that will help bring life-changing technology to those in need. We are very excited about the opportunity to leverage these relationships across our broad customer base so that they, too, can take full advantage of the digital transformation opportunity that IoT represents.

The fourth pillar of our strategy, rightsizing the cost structure of Avnet, is also about preparing Avnet for the future. The combination of the divestiture of Technology Solutions at the acquisition of Premier Farnell and supplier program changes required us to reconsider how we both run and support the business across the enterprise. We expect to realize $120 million of annual savings by streamlining our structure, eliminating redundancies and centralizing certain functions. We're also in execution phase on several initiatives, and Ken will update you on the progress later in the call.

The important thing is we expect these savings not only to improve our financial performance, but also allow us to reinvest more of our gross profit dollars back into the business. The technology markets we serve are going through rapid changes as combinations of the Internet, new software tools, higher-speed networks and standards-based designs are expanding the number of potential customers and products we support. Our goal is to provide critical services at each stage of the product life cycle as we help customers move from idea to product and from product to market.

Finally, we recently announced a key addition to our leadership team with the appointment of Tom Liguori, our new CFO. In addition to his wealth of experience, Tom has an impressive track record helping transform businesses to drive financial growth and shareholder value. We are confident Tom's ability to partner across all levels of the organization will expedite our transformation while laying the groundwork for future strategic investment. And I'd also like to thank Ken Jacobson for the outstanding job that he did as interim CFO as we made steady progress on our financial commitments under his leadership.

Now I'd like to turn the commentary over to Ken to provide more color on our financial performance. Ken?

Thank you, Bill, and hello, everyone. In our December quarter, reported revenue grew nearly 6% year-over-year while organic revenue increased nearly 2% in constant currency. When you exclude the negative impact of the previously announced supplier program changes, revenue would've increased 7.5% year-over-year in constant currency. At Premier Farnell, which was acquired in mid-October of fiscal 2017, organic revenue grew 12.3% year-over-year or 7.7% in constant currency.

Gross profit of $602 million increased $16 million or 2.8% year-over-year, primarily due to a full quarter of Premier Farnell results in the second quarter fiscal 2018. Gross profit margin of 13.3% increased 18 basis points sequentially, primarily due to improvements in the Western regions at Electronic Components.

Adjusted operating expenses of $457 million increased $35 million from the year ago quarter, primarily due to the acquisition of Premier Farnell and changes in foreign currency exchange rate. Sequentially, operating expenses decreased $14 million or nearly 3% on a reported basis. Of the $14 million sequential reduction, approximately $10 million is attributable to our cost reductions initiatives for an annualized impact of $40 million.

Since exiting our previous fiscal year, the quarterly operating expense run rate has been reduced by nearly 4% or $18.6 million on a reported basis. This reduction trend is net of the increase in operating expenses incurred as a result of year-over-year organic sales growth.

Our reduced operating expense in the December quarter further demonstrates our commitment to accelerating our cost reduction initiative as 60% of our $120 million of annualized cost savings has been achieved in the first half of fiscal year, with the remaining savings to be realized in the second half of fiscal 2018.

Adjusted operating income of $146 million increased nearly $4 million from the September quarter, and adjusted operating income margin was up 17 basis points, primarily due to improvements in the Americas region of Electronic Components as well as an increase at Premier Farnell. Adjusted operating income declined nearly $19 million, and adjusted operating income margin declined 63 basis points year-over-year as the addition of a full quarter of Premier Farnell was offset by the negative impact of supplier program changes.

Adjusted earnings per share of $0.78 exceeded the high end of guidance and increased $0.02 sequentially, primarily due to improvements in the Americas region for both Electronic Components and Premier Farnell.

Now let's take a further look at organic revenue growth by region. Avnet organic revenue in constant currency grew 3.5% and 1.9% year-over-year in the first and second quarters of fiscal 2018, respectively. When you exclude the negative impact of supplier program changes, our adjusted organic growth was 8.3% and 7.5% in the September and December quarters, respectively. These growth rates compare favorably to our fiscal 2017 organic growth and overall market growth. On a sequential basis, the Americas region had the most significant improvement as year-over-year reported growth improved from a decline of 16% in the September quarter to a decline of roughly 6% in the December quarter.

In the EMEA region, when you exclude the impact of supplier program changes, year-over-year growth in constant currency slowed to nearly 6% in the second quarter of fiscal 2018 after 4 consecutive quarters of double-digit growth that averaged nearly 17%. In the Asia region, which has now offset the impact of supplier program changes, organic revenue increased 10% year-over-year in constant currency and over 15% when you exclude the impact of supplier program changes. With the EMEA and Asia regions having offset the impact of supplier program changes and the Americas region improving steadily, we are confident that our growth initiatives are ramping and we expect them to drive further improvement going forward.

In the December quarter, working capital decreased approximately $6 million sequentially. An inventory increase was offset by a reduction in receivables and an increase in payables. The increase in inventory represents additional investments related to a strong book-to-bill and extending lead times to support the seasonally strong growth in the Western regions in the March quarter and further expansions of SKU count at Premier Farnell. When you exclude the impact of changes in foreign currency exchange rate, working capital decreased $25 million on a sequential basis and increased $467 million year-over-year. The year-over-year increase is driven by the organic growth in the Electronic Components business and the investments in inventory to expand the SKU count of Premier Farnell.

In the second quarter of fiscal 2018, cash generated from operating activities was $69 million. During the first 6 months of fiscal 2018, we received approximately $125 million from the sale of Tech Data stock, which was acquired from the divestiture of our Technology Solutions business. We used the proceeds to repurchase $139 million or 3.6 million shares via our disciplined share repurchase program. The remaining $125 million of Tech Data shares will be sold after the lockup period expires during the March quarter and will be used to repurchase shares through the remainder of fiscal 2018. Entering the third quarter of fiscal 2018, we have approximately $460 million remaining under our current share repurchase authorization.

We ended the quarter with $590 million of cash, of which $570 million was outside of the U.S. We expect to generate operating cash flow through the remainder of fiscal 2018 from a combination of operating income and disciplined working capital management as we remain committed to value-based management and achieving the right balance between earnings and return.

Regarding the recent U.S. tax law changes from the Tax Cuts and Jobs Act, our adjusted effective tax rate for the December quarter remained within our previous guidance. Our current mix of taxable income comes mostly from our foreign operations due to our corporate and interest expenses being primarily U.S.-based and due to the recent challenges experienced in our Americas business. In the near term, we do not expect a significant impact on our December quarter adjusted effective tax rate as a result of the U.S. tax reform as the new U.S. tax rate approximates our current blended effective tax rate in foreign jurisdictions.

We do have a significant amount of unremitted foreign earnings, which total approximately $3.3 billion at the end of fiscal 2017. We're still gathering and analyzing necessary information on our unremitted foreign earnings and associated foreign tax credits, but due to tax reform, we currently expect to incur a material onetime income tax charge on our historical unremitted foreign earnings that will be paid over the next 8 fiscal years beginning in fiscal 2019.

From a foreign cash repatriation standpoint, we are currently evaluating the foreign tax implication of repatriating excess foreign cash. If the foreign tax impact of repatriation is cost effective, then we will pursue a repatriation of excess foreign cash not needed to fund our offshore working capital requirement. For working capital purposes, we believe we need between $200 million to $250 million of foreign cash on hand to run our foreign businesses. Going forward, our intention is to maintain the same capital allocation priorities we have pursued in the past, invest in organic growth, return excess cash via our disciplined share repurchase and dividend programs and invest in strategic M&A opportunities.

Looking forward to Avnet's March quarter, we expect sales to be in the range of $4.65 billion to $4.95 billion. Based on this revenue forecast, we expect adjusted diluted EPS to be in the range of $0.90 to $1 per share. We have also increased our fiscal 2018 outlook from an annual revenue in the range of $18.1 billion to $18.5 billion to a range of $18.5 to $18.9 billion and adjusted diluted EPS from the range of $3.10 to $3.60 per share to the range of $3.35 to $3.55 per share. The increase in fiscal 2018 guidance represents an approximately 2.2% increase in revenue and a 3% increase in adjusted diluted EPS as compared to the midpoint of prior guidance.

Assumptions related to our third quarter and full year fiscal 2018 guidance can be accessed in our earnings press release or 8-K filing at our website, www.ir.avnet.com.

With that, let's open up the line for Q&A. Operator?

(Operator Instructions) Our first question comes from the line of Jim Suva with Citi.

A quick question. You posted for the December quarter operating margins in your EM group of about 3.1% -- about, I think it might be right there. That is down year-over-year. Of course, you had some chip suppliers leave as well as some chip suppliers come in, in the ERP system and such. And you also have restructuring going on. So my question is, going forward, do you anticipate that number to be stable at that? Go higher? And if so, if it does go higher, can you help us quantify so we don't get too ahead of ourselves because I think a year ago, it was in the mid-4% range?

Sure, I'll give a little color to that. This is Bill, and thanks for your comment, Jim. Appreciate it. With respect to our long-range planning target, they haven't changed from what we gave you last quarter, which was by 2020, we expect to be somewhere between 4.5% and 5% operating income margin, so that remains the same. And we are hoping to have a nice glide path to that number as each quarter goes by, so we are looking to get continued improvement. If you looked at Premier Farnell, we had an improvement there. When we bought the property, it was in the 6% to 7% operating income range. Now it's closer to 10% range. And we're seeing strengthening across all of our regions in the core business, including the Americas, which is a great sign of the fact that we will have an improved operating income moving forward.

But that improvement, do you think you can get back up to those historical ranges in the 4%? Or I guess, the concern is with the vendor consolidation or the chip consolidation, is pricing and margin a little bit different than what they have been historically?

There's no doubt that we've had pressure from gross profit from supplier consolidation. However, with our 4-pillar strategy that I laid out earlier in the call, we believe that's going to position us well, getting more of our business digitally focused, which is not just e-commerce, but it also is digitizing our own business so we can take more OpEx out, rightsizing the company and maximizing usage of the ecosystem as well as the transformation projects that's well underway. Let me speak to that for just a moment. We're about halfway through the transformation projects, and we're ahead of where we expected to be with respect to savings, which include both growth projects as well as cost reduction projects. And we see that -- those 4 things as helping us shore up our margins going forward and being able to offset what we've seen as far as pressure from the suppliers.

Our next questions come from the line of Adrienne Colby with Deutsche Bank.

I was wondering if you could tell us what book-to-bill was in the quarter.

Sure. Book-to-bill across all of Avnet was well over 1.1. And in some cases, I'd say the average of the company, about 1.1 -- 1.16, so really healthy outlook for the business right now. So we're pretty excited about what the future looks like.

Great. So my question would be, organic growth decelerated sequentially from about 2% to 1% despite what seems to be an otherwise pretty positive or healthy demand environment and what you mentioned were improving declines in the Americas. Can you help us define the dynamics in the quarter and maybe the weakening you're seeing in the EMEA region in terms of your expectations there going forward?

Okay, a couple of points I'd make on that. First, if you take out the supplier impacts that we had, we grew as a company at 7.8%. So that's, I think, an important metric to look at. So when you normalize out, if you take the suppliers out, we had a pretty healthy growth. Regarding EMEA specifically, look, we had 18 quarters of growth in EMEA. We've now lapped a double-digit growth year, so it's not surprising that it's come down a little bit. But that -- I would still say that EMEA is on fire for us, and we -- we're taking share. We've been able to win lots of customers, and we're replacing all of the sockets that we've lost with respect to some of the supplier dislocation. So we're pretty bullish still on what's going on in EMEA.

Our next question comes from the line of Matt Sheerin with Stifel.

Just following up on the question regarding the current business environment. If you look at your guidance, it actually looks like you're seeing accelerated organic growth above seasonal. So could you give us an idea of what you're expecting per region relative to normal seasonality?

We usually don't break it out in that sort of detail. I will tell you what we think overall as a guidance is we're roughly in line with what we think the seasonality is. But on this call, I don't think we're going to give a change in seasonality. As you know, we're a different business than we were a couple of years ago. And when we do our Analysts Day, we will be real specific about what we think the seasonality is by quarter. We'll lay that out for you.

Matt, this is Phil. I'll jump in on that (inaudible) It's good to hear from you Matt. Just by region's outlook, if you will, I mean, we talked about the Americas. September we knew was going to be a tough quarter. We feel confident coming out of the December quarter in the Americas, and we think that's going to continue with, as Bill pointed out, the positive book-to-bill and backlog's growing. And we're gaining just more customer inspired confidence here at home in the Americas. You just saw that Europe -- Europe continues to be strong. And as for the last question that Bill commented on, we're lapping our own comps at this point in Europe, and -- but definitely, we see positive -- continued positive in the March quarter. In Asia Pac, even with Chinese New Year, the outlook in Asia is looking very positive. So I think I don't want to be -- and it's tough defining what seasonality is, or with all the business change and the climate changes and the applications in the market, I think we got to look in the venture if I got to readjust some of our own seasonality based on the new model we have moving forward. But I just want to give you that additional color. All regions look really, really good at this point in time.

Okay, very helpful. And then just regarding the operating margin opportunities going forward to that 4.5 plus, is that primarily improvements from North America? It sounds like by region, North America may be actually the lower of the 3 regions. So -- and is that the opportunity as you go forward? Or are there some -- I guess, with the Premier Farnell integration in Europe, you still have some room to go there as well.

Yes, no, I wouldn't just point to Americas. But clearly, Americas is an important part of the recovery of our [OI] percent, but it's also the 4 pillars that I described, impact every one of the businesses across, so everyone of the regions and business units across Avnet.

Our next question comes from the line of Adam Tindle with Raymond James.

I just wanted to circle back to the earlier questions on supplier dynamics and pressure. I think you previously mentioned that the changes from TI were going to be out of the model by the end of calendar 2017. So just wanted to confirm that's still the case? And maybe for Phil, what are you seeing from other suppliers? I think you mentioned in the prepared comments you actually had some upside to margin in the quarter due to attainment of a supplier program and margin in the core business in Western region improved. So it doesn't sound to me like other suppliers are moving to pressure price or reduce margins, if I'm understanding that correctly.

Yes, I'll take that. Yes, we are -- 2017 marks the end of the TI model change. We generally don't like to talk specific to suppliers, and they're still a great supplier for us moving forward, no doubt one of our top ones. As far as the model change, a common question we get, no, we don't see other suppliers following suit. As a matter of fact, with some of the other changes we've had to our line card, we see other suppliers really doubling down with us on demand generation, registrations, design wins. I think we noted in the script, actually, where we've had model changes or line card changes, we replaced all those sockets and the numbers of sockets and registrations and design wins. Now we know the gestation period will take anywhere from 8 months to 18 months for us to see that revenue come back into play. But we feel really confident where we're at today and never comfortable, but really confident in where we are today with the current supply base.

Yes, I would add to that, Adam, that -- highlight that we've added 6 new franchises in Electronic Components this quarter and we expanded regional coverage of additional 4 suppliers. And at Premier Farnell, we added 9 new franchises. So I think we're gaining momentum when it comes to suppliers.

Okay, that's really helpful clarification. Just one follow-up on the guidance, particularly the EPS guidance. I think you're implying operating profit dollars are kind of somewhere in the 1.70 to 1.80 range for both Q3 and Q4. I may be missing something below the operating line, so please correct me if I'm wrong. But why wouldn't we see more of a decline in the June quarter based on the implied revenue decline? I don't think regional mix is typically favorable, and it seems like there's little incremental cost cuts. So just trying to understand the expectations and linearity to the back half of the year for profit dollars.

Yes, Adam, this is Ken. I would say you're in the ballpark from an operating income perspective. And I guess, how I would characterize it, I think typically from an EPS perspective, from Q3 to Q4, or say March to June quarter, we've typically been around flattish, not a significant climb so to your point about the cost cuts being some -- the rest back-half loaded, that kind of makes up for some of the lower GP from the sales decline.

Our next questions comes from the line of William Stein with SunTrust.

First, regarding the last topic. It seems to me that the implied guide for Q4 is a little bit below historically what you've done in terms of normal seasonality. I know there was a comment earlier that it's different now. Does this just fit into that narrative of the seasonality being different today, given all the changes in last year or 2? Or does this reflect some incremental conservatism or anything else?

I think it's more of the predictability of seasonality is still kind of a shifting target, but we think that it's in line with what we're seeing right now. And we see a strong Q3 and have to change that when we get to Q4 guidance, we will. But right now, we feel good with the range we've given, and our track record has kind of been -- is coming in the higher end of that range, but we feel pretty confident right now.

I'd also point out that in our guidance also includes a nice sequential improvement in operating income margin. We went up 41 basis points versus the historic range of 35 to 45. And I think that's consistent with Electronic Components' historic performance with the experience of the mix shift to higher margin in Western region. So I'll give you a little bit more color on our thoughts on the seasonality.

That's really helpful. Just a couple of quick follow-ups. First, there was an inventory build sequentially, and year-over-year was even more significant on a dollars basis. That was sort of surprising to me given, number one, you're improving -- well, that's the main issue, right? That you've improved this ERP implementation. You'd normally expect to see inventories come in to a more tame situation. So are shortages influencing that or something else? What's causing this?

I'll give a little color and I'll let Phil jump in as well. A couple of things that we -- or definitely, things that we've done. One, for example, we expanded SKU count and the inventory in Premier Farnell. As you would recall, we profiled that versus Premier's competitors. We didn't have as many SKUs. Now we're adding more in order for us to gain more business, and we'll get a big payoff for that. That's a good thing. Second thing is we've implemented the first ERP system since the Americas one, highly successful in Europe. And we had a inventory buildup in order to make sure that we were prepared for any glitch that might occur, which didn't occur since we had essentially knock on wood, a flawless implementation. And so those are the 2 key primary reasons why the inventory went up with that, and our game plan going forward supports that by bringing down working capital and working capital [gain].

Yes, let me add to that, Will. And you mentioned the Americas and ERP, and we're still working through that, right? So we're gaining improvements there. We're going to continue to see improvements as well. We're helping all the industries that we track and that you track. And the other thing is lead times, and Bill kind of alluded to that. Lead times are not coming in. Lead times are out. Our book-to-bill is solid, okay? So we got to build the appropriate inventory, okay, to support the book-to-bill and the backlog we have going into the March and June quarter. So we feel pretty good with the inventory levels right now, by the way, and we don't see them increasing in the March quarter by any stretch of the imagination. It's really there just to support the growth and the lead time issue as well as, as Bill mentioned, the boost implementation ERP in Europe.

Our next question comes from the line of Shawn Harrison with Longbow.

Wanted to just talk first about the linearity of the, I guess, the remaining cost cuts. It looks like there's $50 million annualized. How is that split between the March and June quarters?

Yes, I guess, I would say that it's more backloaded to the June quarter. And we've got about 60%, so I would say kind of directionally, you get another 15% in the third quarter and then the remaining 25% in the fourth quarter.

Okay. And then if I may follow up, it was touched on this briefly earlier in the prepared remarks. The new sockets, one, that comment, that's essentially saying those that have left Avnet, you found other suppliers now to replace those and you're at a point of ramping just fulfillment revenue, or was the comment on your -- the design registrations associated with that business? Just trying to get better triangulation of kind of what those comments actually mean to revenue growth, let's say...

I'll say a few comments and I'll let Phil chime in as well. It means that we've replaced -- the sockets that we lost, we've now replaced them with design registration with other suppliers on our line card. However, as you know, it takes anywhere from 6 months to 18 months to convert a design registration into a design win and get the revenue for them. So the point is we made great progress on being able to design in others in the line card and be able to make up the losses that we have with those supplier shifts.

No, I think you said it well, Bill. It wasn't all new suppliers, it's really most of our current suppliers so they have similar technology. And we don't have any one supplier apart from maybe an FPGA supplier that is exclusive from a technology standpoint. So we have gaps and overlaps with the line card. So if someone decides to move to a different model or change their line card or their channel strategy, we have other suppliers that have those similar technologies that we can move forward with. And that's what we did, we just doubled down our resources with them as they did back with us.

So it's a demonstration of the breadth of our line card. And as Phil pointed out, that we don't have any gaps. We actually have the ability to be able to shift pretty quickly with respect to our design resource.

Our next questions comes from the line of Steven Fox with Cross Research.

First question. You mentioned that you've added SKUs to Premier Farnell. And you also mentioned, I think it was 9 suppliers that joined the Premier Farnell line card. So I was hoping to get just a little bit more color, how much can you give on -- in terms of how much the SKU count went up? How much was just from using internal relationships across Premier Farnell? And how much was related to some of the new suppliers? And then I have a follow-up.

Well, that's a lot there, Steve. So I think I'll take a try it. So what we did was we profiled the industry, and we looked and said, okay, where does Premier Farnell stack up with respect to SKU counts versus where they compete against? And we were short. So what we did was we analyzed where the highest runners were, and we were systematically putting in those highest runners. And we'll continue to add as long as we see that there's a payback in return. And as you see with the growth out of Premier Farnell and the increased profitability, we're -- it's a good bet for us, and we'll continue to do that. With respect to the 9 suppliers and franchises, some of that is the fact that we have the ability to utilize some of the supply lines that are in Avnet, and therefore, we're able to now win them in Premier Farnell because of the relationship between Premier Farnell and Avnet. So I give you this kind of number as far as SKU count goes. In half a year, we added about 50,000 SKUs to give you a roughly like number.

And most of that was by leveraging existing relationships that Avnet already had?

No, most of them were actually existing relationships Premier Farnell had. Some of it was from Avnet, but most of it was from Premier Farnell.

Okay. And then can you provide a little bit more color on just the exact level of growth in terms of your design wins and how it compared to maybe the last quarter or 2?

Yes. We'll have to get back to you on that one. I don't have that right in front of me, but we'll get that offline. We'll have it for you later.

Yes, Steve, it's Phil. I don't have the data point in front of me, but we can give it to you in a one-on-one.

Okay. And then just very last question, if you could just give us a sense, when you look at the guidance of the full year now versus prior, how much exactly was related to currencies on the top line versus 90 days ago?

Yes, I would say currency is driving a little bit. The rate went up. But we also have a fair amount of, let's say, dollar sales in Europe. So I would say there are some little bit of washing of FX because, although there were some declines, there are some improvements because of the stronger euro. So I don't think it's the biggest driver of that.

Our next questions come from the line of Mark Delaney with Goldman Sachs.

My first question is on the 2018 revenue guidance. I think the company took up its revenue guidance by $400 million at the midpoint. Can you help us better understand what the key drivers are of that incremental $400 million versus the company's prior expectation, and if any of that is coming from the Marvell win that the company talked about last quarter? And if Marvell is not -- should be this year, when should we think about that coming in?

Yes, let me take a shot at that, Mark. This is Phil. We're just seeing -- we're seeing generally good organic growth, right? And Europe, as we touched on earlier, is continuing to show strength, good strength in both the automotive, by the way, and I should note automotive in all regions, we're seeing good growth, and as well in the industrial segment. So we're seeing good organic growth in Europe; accelerated continued growth, as we talked about earlier in Asia Pac. And as we talked, our Americas numbers are starting to get better, and that is helping tremendously, okay, on not only the, Bill pointed out earlier, on the top line, but also on the bottom line as we get more healthy in the Americas. So that's the bulk of it. I wouldn't say the Marvell win, although a big one. I think that'll start to have a bigger impact for us in the balance of the calendar year, but that wouldn't be -- some of that would be in there, but not a whole lot of it at this point in time, Mark.

That's helpful color, Phil. And then for my follow-up question, and I'm hoping to just better understand the SG&A dollars for the March quarter. I think traditionally in the March quarter, it's maybe $5 million to up $10 million or so. Or in some years, it may have been up a little bit more than that. But with incremental cost cuts that are coming in, I've been expecting it to be relatively flat. But when I try to back it into the guidance, it seems like maybe SG&A dollars are up more like $15 million to $20 million sequentially. So maybe just help me understand the SG&A line a little bit better and maybe trade-offs around gross margins so we can better understand the guidance.

Sure. Yes, I guess, this is Ken. I would say that one thing you have to think about it is, on your OpEx line, you do have some FX impact there and then you have the volume as well. So those 2 things are driving up a little bit. You're right that, historically, it is up, and then there is still some net savings there from the cost reduction actions we talked about.

This concludes our question-and-answer session. I'd like to turn the floor back to management for closing comments.

Thank you for participating in our earnings call today. Our second quarter fiscal 2018 earnings press release can be accessed in downloadable PDF format at our website, www.ir.avnet.com. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.